Currency exchange is one of the largest financial services markets with transactions averaging $1.5 trillion per day. Currency exchange may be performed for a variety of reasons.
For example, an American retailer may need to purchase cameras from a Japanese company. Depending on the details of the agreement, the retailer might pay the Japanese company with either Yen or U.S. Dollars. If the retailer is to pay in Yen, he will need to exchange an appropriate amount of U.S. Dollars for Yen. Even if the retailer pays in Dollars, currency exchange is likely as the Japanese company will likely wish to exchange at least some of the received U.S. Dollars for Japanese Yen. In a likewise manner, currency exchange is necessary when a company purchases supplies or components from a foreign entity. Because of the increasing ubiquity of transactions among business entities located at various points all over the world, it is fair to state that currency exchange plays a vital role in the execution of modern business.
As another example, an American investor might guess that, due to certain geopolitical conditions, the value of the Euro will rise with respect to the U.S. Dollar. Such an investor might choose to exchange a certain number of U.S. dollars for Euros, with the hope of exchanging those Euros for dollars at a later date for a profit. Thus currency exchange also provides an investment opportunity.
Foreign exchange is also necessary for the purchase of foreign bonds and securities. For example, an American wishing to purchase Canon stock on the Nikkei exchange would first need to exchange U.S. dollars for Yen. Similarly, an American wishing to purchase German government bonds would first need to exchange U.S. Dollars for Euros. It is estimated that as much as 90% of currency exchange is related to security and bond transactions.
Despite the importance of currency exchange, the mechanisms currently in place for performing such exchange are flawed. For example rather than being able to perform currency exchange themselves using a broker, individuals and entities typically rely upon banks to perform the exchange on their behalves.
Furthermore, individuals and entities performing currency exchange are often unable to adequately control the rate at which an exchange will occur. Reasons for this include the relatively large amount of time that often occurs between request for a trade and its execution. Because of the large quantities of currency which are often exchanged, even small changes in exchange rate can have major effects. For example, suppose an American computer manufacture agreed to purchase ten thousand microprocessors at a cost of 4,000 yen each. If, at the time the deal were made, the exchange rate was 81 Yen per U.S. Dollar, the American company would expect to pay a total of $493,827.16. If at the point the currency exchange actually occurred the rate was 79 Yen per Dollar (a change of only 2.45%), the American company would end up paying a total of $506,329.11, $12,501.95 more then expected.
Additionally, factors such as the lack of open, centralized markets results in direct exchanges between certain currencies not being possible. For example, it might not be possible to directly exchange currency A for currency B. Thus it would become necessary to exchange currency A for currency Q, and then to exchange currency Q for currency B. The necessity of such additional steps not only increases the time required to perform a trade, but may also lead to additional costs. For example the labor required to perform the additional steps can lead to higher fees from the banks performing the exchanges. Perhaps more importantly, the increased time for the completion of an exchange increases the likelihood that the rates will stray from what they were when the exchange was decided upon. This might lead to an unexpected loss of capital.
For at least these reasons, there is a need for an improved currency exchange method.